Archive for October 2012

Energy Consumption and Conservation in NH

October 31, 2012

The energy intensity of the NH economy (as measured by BTUs per dollar of real gross state product) continues to decline as it does in other states and the nation as a whole (chart below) .  NH is among the bottom ten states in energy intensity as more of the value of what we produce is in the form of services and in goods that have more human and less energy content.  In New England, only Maine is above the U.S. average in energy use per dollar of gross state product.

The second-half of the past decade saw especially large increases in energy prices in the U.S..  The nation als0 experienced a severe recession that reduced the demand for energy.  Between 2004 and 2010, end-use energy consumption in NH (end-use consumption excludes energy used for electricity generation) declined by about 11%.   Some of the recent declines in energy use in New Hampshire and the nation is the result of a severe recession as well as the impact of petroleum price increases.  Some is also the result of energy conservation efforts, but whatever the prompt, economic, environmental, weather or other, some end-users have cut back much more than others.  The chart below shows the percentage of total end use energy by type of end use in NH in 2004, along with the percentage of the reductions that each type of end use was responsible for between 2004 and 2010.  Industrial use accounted for a disproportionate share of the reductions, in large part because of the recession and changes in the industrial mix in the state.  But conservation no doubt also played a role.  At the other end of the spectrum is the transportation sector which although accounting for one-third of consumption, accounted for only 7% of reductions in energy consumption in NH between 2004 and 2010.   It is hard to imagine continued declines in energy use unless the transportation sector contributes more to the reductions.

What Will the “Fiscal Cliff” Mean for NH?

October 30, 2012

For an economy struggling to gain altitude it is hard to see how the impending spending cuts and tax increases associated with the “fiscal cliff” will do anything in the short-term but bring the economy to stall speed or push it back into recession.  At a time when compromise is seen as weakness and ideological impurity, an agreement must be reached in order to avoid the negative effects of the the fiscal cliff.  Depending on what is included, the ‘fiscal cliff includes anywhere from $500 to $700 billion in combined spending cuts and tax increases (many via the expiration of temporary cuts).

All states will feel the effects of the elimination of the temporary cut in the payroll tax but states with a higher percentage of high-income taxpayers will likely be affected more by the expiration of Bush era tax cuts.  Despite often being characterized as a “tax haven” for the rich, NH is much more a “haven for the middle class” as it has a somewhat higher percentage of high-income households than the U.S. (but much lower than MA) and a relatively smaller percentage of lower- income individuals.   The percentage of high-wealth individuals in NH is above the U.S. average, but the percentage of income taxes paid by those making $200,000 or more in NH is lower than 24 other states.

States where higher-wealth individuals pay a larger portion of the  state’s tax burden are likely to be relatively more affected by the tax cut expiration provisions of the fiscal cliff.   But NH will still see an estimated increase in payroll taxes of about $650 million, a significant drop in disposable income in the state.  In addition, a study by George Mason University’s Center for Regional Analysis estimates that the defense department and non-defense department budget cuts that will  result from  the fiscal cliff will cost NH about 6,300 jobs and $325 million in labor income.  NH no doubt will take some solace from the fact that Massachusetts is likely to see nearly 10 times the job losses from  budget cuts to defense and other purposes (especially medical) and as a result of  their high percentage of high-wealth households.

I want to think a reasonable resolution will be found that avoids the worst of the potential problems from the fiscal cliff.  Fiscal tightening is clearly warranted,  and it appears almost certain that at a minimum the payroll tax holiday will be allowed to expire  as well as the Bush era tax cuts for upper income households.  It is also almost certain that long term unemployment insurance benefits will be allowed to run out.  After that, it all depends on one four-letter word – compromise.

Some Good News in Some Very Bad Weather

October 29, 2012

(My apologies for the late post – I posted this 3 hours ago but it didn’t publish so I am trying again)

PolEcon’s NH Leading Index jumped from a revised + 3.7 to +13.0 this month. its highest value since January of 2011.  An Index reading of + 13.0 isn’t a signal of robust growth but it is a substantial improvement over much of the past 18 months and if it continues for another month or two it will be a clear sign of a much improved NH economy.

Weather and electricity permitting, the October edition of the Trend Lines will be emailed or available to read online at http://www.issuu.com/polecon.    Seven of the nine indicators in the Index improved over the month, with initial claims for unemployment insurance showing an especially large drop.  I prefer initial claims data to the unemployment rate, as it gives greater insight into the near-term direction of the labor market.  I’ve stated in a prior post that I believe job growth in NH will be revised upward, based on aggregate wage and salary growth and the volume of help-wanted advertising in the state.  Declining initial unemployment claims are another indicator that actual  job growth is likely somewhat higher than is currently being reported (NH has seen a few negative year-over-year monthly job growth reports recently). At an average weekly number of claims at 1,400 for the month, it is still much higher than the under 1,000 number that is typically seen during periods of solid job growth, but the number continues its downward trend.  The chart below shows how new claims currently compare with claims during previous periods of growth and recession.  On a three-month moving average basis, the number of new claims in NH  is now about what is was during the short-lived recession of the early 2000s, and compared to the first “great recession” of the early 1990s, it is also about as high now as during that difficult time.  But there is also a larger population in the state and also more employment  so examining initial claims as a percentage of employment in the state provides a better comparison to where the labor market stands today and where it may be heading.  That comparison makes the current labor market appear to be in the early stages of recovery from recession rather than two years removed from the official end of one, but its a sign of recovery nevertheless.

Keeping an Eye On Which Prize?

October 26, 2012

Every state is obsessed with maintaining or creating a “good business climate.”  I think NH has traditionally had a good business climate, with both the public and policymakers demonstrating a high regard for businesses,  and with a climate of mutual respect between the business community  and state policymakers.  At times they have differed in their views, and the balance of interests could change marginally from time to time, but over the years there was a nice balance where each was able to ultimately rely on one another to increase opportunities and prosperity in the state.  There is a lot of fretting over the business climate in the state and what it means for our ability to “attract” businesses. That is always a good thing to monitor, but I am concerned that we (business people, policy makers, citizens) may be spending too little time concerned with creating a climate that is attractive to individuals.  More specifically, skilled individuals with higher levels of educational attainment that increasingly are the source of competitive economic advantage in states and regions.  The in-migration of individuals with higher levels of educational attainment fueled NH’s economy and increased the concentration of technology and higher-skill industries and occupations during much of the past few decades, just as it has in other states that have been able to successfully attract skilled, well-educated individuals.   The chart below shows how the educational attainment of NH residents differs between  those who were born and continue to live in NH, and those who live in NH but where born in another state (in a future post I will discuss international migrants).

The chart shows that residents who have moved to NH from another state are much more likely to have a bachelor’s or higher educational degree.  NH regularly loses its natives with higher-levels of educational attainment to others states, just as other states lose those individuals.  Individuals with higher-levels of educational attainment are the most mobile in society.  They have the most opportunities and generally resources that afford them more choices on where to locate.  That means that the native population will often show overall levels of educational attainment lower than in-migrants from other states.  In-migrants to MA also have much higher overall levels of educational attainment than natives who live in the state,  but the native population that was born and lives in MA has higher levels of educational attainment than the native population in NH.  In fact, educational attainment among those who where born and live in MA looks a lot like the in-migrant population of NH, not surprising since about 300,000 individuals born in MA now reside in NH.

In-migration to NH has been slowing and recently stopped, with tremendous implications for our economy’s ability to grow, innovate, and remain dynamic.  Lets keep our eye on maintaining a good business climate (we can start by reinforcing our tradition of mutual respect between business and government), but I think we need to quickly  begin asking ourselves if a singular concern about business climate is sufficient to assure growth in our economy  if NH is losing its attractiveness to the individuals who are increasingly the source of its economic strength.

Spotting Bubbles After They Burst

October 25, 2012

I’ve lived through two housing bubbles since I was old enough to know and care about them.  During the first one I was writing quite unpopular reports for developers and lenders (I’m still not very popular with realtors) that  indicated, to me at least, that the “effective demand” for housing in many areas just would not support a viable project (based on the fundamental underlying determinants of the demand for housing – population, employment, and income growth as well as new household formations).  I did not understand then nor do I do now, how an industry (home building) can survive when so many decisions it makes are made with a view toward the immediate past (what sold last week or month and at what price).  Of course everybody, including me, recognizes a bubble after it has burst.  But there really is no substitute for understanding the fundamental underlying demand for housing in a region or community when making a decision about building or buying housing.  Few have the patience or knowledge to assess the “effective demand” (the willingness AND ability to purchase) for housing versus the desire to purchase based on the current sentiment about the housing market.  Potential home buyers are not likely to get that understanding from a real estate industry that can make money from a purchase regardless of whether the purchase increases in value or not.   It is easy to see the “effective demand” for housing and the real conditions of the market after the fact, as with the many charts I see that show how  the relationship between home prices and household incomes in a region was widening prior to the last housing market crash.  Its a great way to make a call after the game is over.  Household income data is reported with a lag of more than a year for smaller areas, is subject to a significant margin of error, and may likely be revised sometime  down the road.

There really is no substitute for understanding the fundamentals but a quick and easy way to get a sense of where the home buying market is, is to look at the ratio of the monthly cost of purchasing a home (at the average selling price) versus the monthly cost of an average rental.  Both selling and rental price data is readily available in NH from, among other sources, the NH Housing Finance Authority which regularly does rental price surveys.  The chart below shows the ratio for NH going back to 1990.  The ratios can be calculated for sub-areas of the state and for communities as well.  The ratio is not a substitute for a thorough analysis of “effective” or fundamental underlying demand that all home builders should undertake, but for home buyers, it clearly shows that when the ratio gets above 130% or 140% (which can be determined with a data lag of only a few months at most) a bubble is likely forming.

The Disconnect Between the Cost of Generating Electricity and Retail Prices

October 24, 2012

It is hard for consumers of electricity to understand why retail prices are what they are and how they are determined.  It is beyond one blog entry to fully describe the process but in overview, the suppliers  of electricity (generating companies) in a region offer to supply electricity to the market at a given price and the offers are accepted beginning with the lowest cost providers first, until enough energy is supplied to meet expected demand in the region.  The price of electricity offered by the last electricity generator needed to meet the regional demand determines the market price paid by companies that supply the electricity to businesses and consumers.  Retail prices are a function of the market price of electricity, plus many other costs such as transmission, special infrastructure charges, and profits by suppliers, among others.  Much of these costs are determined at the state level by regulators, as well as the characteristics of the retail electricity market in the state (competition) and the practices and policies of the companies that supply electricity to retail markets.

The end result is that retail prices for electricity in any state bear only a limited relationship to the cost of generating electricity in the state.  The chart bellow shows that the cost to generate 1 million BTUs of electricity in New Hampshire is about in the middle of all 50 states.  Vermont is also relatively low.  Both states have a relatively lower generating cost per million BTUs because a significant portion of the electricity produced in their state is from nuclear generators.

The correlation between the fuel costs to generate electricity in a state and retail prices per 1 million BTUs is modest, explaining less than one-third of the price per million BTU at the retail level.  The chart below show that despite fuel costs that are in the middle of the pack,  NH, VT and CT have high retail prices per million BTU of electricity.   The regional nature of electricity markets along with the policies of state governments and the actions of individual retail sellers of electricity all play a role in disconnect between costs for generating electricity  and prices at the retail level.  We don’t have much control over the  supplies of electricity beyond our state but we do have some control over the mix of suppliers of electricity which determine the cost of fuel for generation and we have a lot of control of the structure of retail markets and many other factors that determine the non-generating costs of electricity in the state and ultimately prices at the retail level.

The Changing Banking Market

October 23, 2012

Public antipathy toward large financial institutions  may have been building throughout much of the past decade but it surely peaked during and immediately following the recent recession and the financial crisis that helped precipitate it.  One result appears to be a changing market structure for deposits and loans at financial institutions in NH and across the country.  The recession in our state was less severe than was the recession of the early 1990’s, and less severe than was the recent recession  in  many states because of the the overall health and strength of our state’s banking institutions.  Nevertheless, one fallout from the financial crisis appears to be a growing market share for credit unions in the state.  As the chart below shows, since the recent recession, deposits at credit unions have grown much faster than deposits at NH banks overall.  Deposits at NH community banks have grown faster than deposits at all NH banks, suggesting that deposit gains by credit unions have come largely at the expense of large banks in the state, as deposit growth for all NH banks is much lower than the growth among just community banks.  Prior to the recession and financial crisis, deposits at NH community banks were growing faster than were deposits at credit unions.

It would be unfortunate if community banking institutions that have had strong commitments and links to their local communities  and regional economies are tarred by the actions of institutions from afar. Beyond that, a fundamental change in the market shares for financial services could  have significant impacts on the regulation of financial services, on government revenues , and on market shares as the tax exempt status of credit unions contributes to their ability to compete and capture market share.  The increased concentration of deposits in the banking industry that occurred during much of the 1980’s and 1990’s may now  be occurring among credit unions.  As the services credit unions offer and their branching look more and more like those of banks, their ownership and regulatory structure may be the only thing that distinguishes them from banks.


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